A firm is currently producing 3,000 units of output daily by employing 20 units of labor at a price of $100 per unit and 40 units of capital at a price of $40 per unit. The marginal product of the last unit of labor employed is 50, and the marginal product of the last unit of capital employed is 30. In order to minimize its production costs, the firm should do which of the following? a. Employ more labor and less capital because the marginal product of labor is greater than the marginal product of capital.
b. Employ less labor and more capital because the firm is currently spending $2,000 on labor and only $1,600 on capital.
c. Employ more labor and less capital because the firm already employs 40 units of capital and only 20 units of labor.
d. Employ less labor and more capital because the marginal product per dollar spent on labor is less than the marginal product per dollar spent on capital.
e. Employ less labor and more capital because a unit of labor costs $100 while a unit of capital costs only $40.

Based on the marginal products of labor and capital, the company should d. Employ less labor and more capital because the marginal product per dollar spent on labor is less than the marginal product per dollar spent on capital.

The company should invest more in the method of production that gives it more marginal product per unit.

Marginal product per unit of labor:

= Marginal product of labor / cost of labor

= 50 / 100

= 0.5 per unit

Marginal product per unit of capital:

= 30 / 40

= 0.75 per unit

Capital has more marginal product per unit and so should be invested in more than labor.

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e. Employ less labor and more capital because a unit of labor costs $100 while a unit of capital costs only $40.

Explanation:

By employing less labor and more capital, the firm can produce the 3,000 units of daily output at lower production costs since 40 units of capital cost $40 per unit, than it can with 20 units of labor priced $100 per unit.  Capital can, therefore, minimize the total production costs, as less labor is used.  Capital resources are often in the form of equipment and technological advancement that make work easier, faster, and more efficient with the highest quality possible.